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The Wonders of Compounding

As global markets continue to tread water, a common mistake is placing undue importance on short-term forecasts, rather than focusing on fundamentals. Importantly, times of uncertainty can create the greatest of opportunities for patient investors. As such, now could be a good time to look for quality businesses selling at affordable prices.

While it can be difficult to peer through the mist, a company of true quality will endure through the cycle, and likely thrive in the recovery.

Throughout times of general market activity, companies with the ability to compound over a long period will often sell at excessive prices in relation to present earnings. For reference, we have listed a few below.

Clearly, people can see the value in holding these investments when the outlook looks generally favourable, or at least not negative. However, to further demonstrate the power of holding companies that can compound their earnings over time, we illustrate the potential of two investments with present earnings of $10m yet set to grow at a different pace.

Company A

10 Years compounding earnings at 5% - cumulative earnings $132,068

Company B

10 Years compounding earnings at 14% - cumulative earnings $220,445

It's also important to remember that this equation is only possible if both companies re-invest all their earnings. Stated another way, if you opt for a cash dividend, the money that you receive will either be consumed or likely compounded at a lower rate.

Any information has been prepared for the purpose of providing general information only, without taking account of any particular investor's objectives., financial situation or needs, It is not an offer or invitation for subscription or purchase, or a recommendation of any financial product and it is not to be relied on by investors in making an investment decision. Past performance is not a reliable indicator of future performance. To the extent any general financial product advice is provided in this document, it is provided by Glennon Capital Pty Ltd ACN 137 219 866, AFSL No. 338 567. An investor, before acting on anything construed as advice, should consider the appropriateness of such construction and advice having regard to their objectives, financial situation or needs.

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